Old paradigms can’t meet emerging demands, says Chris Berry

by Greg Klein

There was a time when epoch-making events happened, well, only every epoch or so. Now upheavals in technology, demographics and business bring “disruption” to mind more frequently. But whether the word’s a cliché or not, Chris Berry insists real disruption, not incremental change, will be necessary to accommodate new and emerging market forces. The president of House Mountain Partners and co-editor of the Disruptive Discoveries Journal sees particular significance for energy minerals.

Speaking at a May 31 Canvest ’15 presentation, Berry portrayed Western economies as slowing, stagnant or even shrinking. Productivity, to offer one key metric, has stalled. That’s holding back wages, consumption and growth.

Another pull on Western economies is what Berry calls the supercycle hangover. “The first decade of the century saw unprecedented increases in metal prices and metals demand. In addition to that, what we also saw was increases in supply, increases in capacity, the expectation and thinking being that metals prices would either continue to increase or stay permanently high for longer, and that demand from the Chinas, the Indias, the Indonesias of the world would underpin that. Obviously that has not happened.”

But while countries like China and India have slowed their rate of growth, they’re still growing “in many cases well above global GDP.” Can they be accommodated by change that occurs at a merely incremental rate?

Berry thinks not—not when some 600 million people in Africa, half the continent’s population, lack reliable access to electricity. Or when China’s population is only 53% urbanized. In India the figure drops to 32%. “Talk to demographics experts, economists, they say 75% is the benchmark,” Berry said.

Africans, Chinese and Indians “know how we live and ultimately aspire to that,” Berry maintained. But “the current economic paradigm, the growth model, obviously has failed.”

At the same time, deflationary forces can play a positive role, he argues.

Lithium-ion batteries provide one example. On a compound annualized basis, their costs per kilowatt hour have been falling about 14% annually. That means the technology, “whether it’s storage or iPhones, is only set to become more ubiquitous because it’s becoming more affordable, more powerful, every single year.”

Electric vehicle batteries now cost about $400 per kilowatt hour, Berry said. To compete with internal combustion engines, the price would have to drop to an estimated $175. “If the 14% annualized growth rate continues, we’ll be there by about 2022 or 2024. So we’re not that far away.”

Along with the “collapse” of battery prices comes a corresponding fall for silicon photovoltaic cells, measured in price per watt. “This is going to reshape how we produce and consume energy going forward.”

Stepping aside from energy, Berry mentioned the cost to sequence a human genome. “As recently as 2001 it was a $100-million endeavour,” he said. “Now they’re saying within five years you’ll be able to sequence your own genome, so you’ll know everything there is to know about your health, all the good and the bad and how to control that, for about $1,000. That’s amazing. That has huge implications for health care and insurance industries as well.”

If you extrapolate the potential demand, there simply is just not enough lithium and cobalt and graphite above ground and ready to be implemented into these supply chains.—Chris Berry

While media seem to give Tesla Motors a near-monopoly on publicity, the electric vehicle industry goes well beyond one company. After Toyota introduced America’s first e-v in 2000, the market now features 24 plug-ins and 36 hybrids. “Consumers have a choice because technology is rapidly changing and rapidly decreasing in price.”

As for metals implications, “I think you have to look at this disruption thesis for mining in a five- to 10-year window.”

Should e-vs capture 10% of global market share in 10 years, they’d amount to about 10 million cars annually. “That would require one million tonnes of copper every single year. That’s the equivalent of the largest copper mine output in the world, Escondida.”

Do today’s producers anticipate such expansion? “I think the biggest issue everyone is overlooking right now is raw materials access.” Apart from Tesla, an LG Chem joint venture plans to churn out 100,000 e-v batteries by the end of 2016. “If you extrapolate the potential demand, there simply is just not enough lithium and cobalt and graphite above ground and ready to be implemented into these supply chains.” That can only raise prices, Berry stated.

“The question is, what does it mean for specific juniors, specific companies along the entire value chain?” With the converging phenomena of urbanization, declining energy costs, sustainable growth and larger, healthier populations spending more money, the longer-term outlook remains positive for a number of energy metals.

But the disruption Berry sees in this context doesn’t come from technology. It comes from new business models, like the way Tesla’s vertical integration eliminates middlemen. “The car’s amazing, but it’s not disruptive,” he insisted. “It’s an incremental improvement. Similarly, you can look at Apple. The iPod was not disruptive, it was the iTunes store. It’s different business models, that’s what’s disruptive.”